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Intercreditor Agreement Enforced Despite Restructuring of Priority Debt

The Bankruptcy Court for the District of Delaware recently upheld the terms of a pre-petition intercreditor agreement by ruling that the first lien rights of an asset based lending group were not impacted by the pre-petition restructuring of the lenders' debt. In Salus Capital Partners, LLC v. Std. Wireless Inc. (In re Radioshack Corp.), 550 B.R. 700 (Bankr. D. Del. 2016), two groups of lenders provided Radioshack $835 million in financing before Radioshack filed for bankruptcy, comprised of $250 million provided by a term loan lender group and $585 million provided by an asset based lending group. As part of the financing, the two groups entered into an intercreditor agreement that provided the asset based lenders a first priority lien on the liquid assets of Radioshack up to the "Maximum ABL Facility Amount," which was defined as "the combined Revolving Loan Commitments . . . which shall initially be in the amount of $535,000,000, as such amount may be reduced from time to time." A separate group of lenders purchased the asset based loans and restructured them into a term loan, a letter of credit facility, and a revolving loan facility. After Radioshack liquidated its assets, it paid the asset based lenders $232 million. The term loan lenders objected, alleging that as a result of the restructuring of the revolving loans, the Maximum ABL Facility Amount was reduced. The bankruptcy court held otherwise, ruling that the terms of the intercreditor agreement allowed the original asset based loan debt to be refinanced and the terms to be modified. As a result, the obligations, as modified, fit "squarely within the definition of Maximum ABL Facility Amount," meaning the asset based lenders were still entitled to priority. Additionally, the court held that the term loan lenders failed to show that their position was unfairly changed "either as a matter of economics or contract law" as a result of the loan restructuring.

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